Finance Problems Speech or Presentation Example | Topics and Well Written Essays - 750 words

Finance Problems - Speech or Presentation Example A14. (Stock valuation) Suppose Toyota has nonmaturing (perpetual) preferred stock outstanding that pays a $1.00 quarterly dividend and has a required return of 12% APR (3% per quarter). What is the stock worth? By looking at the table and the percentage of increases and decreases among the 3 types of bonds, it is apparent that the interest-rate risk is higher for longer versus shorter bonds. The longer ones are more volatile, which signifies the level of risk for the investor. Bond 3 has the highest volatility among the three. Because the payment to be received would only amount to 150, the future value of the investment only amounts to 150. The number of periods is 3.5 years. Because the coupon rate at 1000 face value is 9.5%, the investor receives 95 in interest payments. Therefore, the expected rate of return amounts to -1.34%. If the company can pay the principal in the end of the contract, the future value would amount to 1,000. Then the number of years in which interest is paid is 10 years, providing an expected rate of return of 22.42%. In order to compute for the value of the stock, all the dividend payment should be discounted back to the present, as well as the terminal price. Therefore, the dividend in year 2 is discounted using the hurdle rate of 13% for two years. This amounts to 0.78. Then the terminal price is determined using the dividend growth model, where the dividend in year 3, which has grown by 6% to 1.06, is divided by the difference between the hurdle rate and the growth rate. Thus, the terminal price of the stock is 15.14. But this is the price at year 3. It has to be discounted back to the present using the hurdle rate of 13%. Thus, the present value of the terminal price is 11.86. In order to get the final value, the present value of the dividend should be added to the terminal price which amounts to 12.64. This will be James valuation. On the other hand, for Bret, the same procedure should be utilized. In order to compute for the